You don’t want a B/D if you can avoid it.

[quote=CCrider]

Tell me why I would want to have a BD if I'm going fee based?  If I can cut them out....they are gone.

Does anyone know the expenses/fees to become an RIA?

[/quote]

One word----Google.

Call some local RIAs to ask them about their experience.

Call Fidelity or Schwab and have them pitch you.

I did this 3 months ago.



1.) We interviewed three B/D firms which would have had us join their

RIA, rather than form our own.

2.) We had 80% of our revenue as fee-based revenue.

3.) We also had been using separate accounts, as well as non-

discretionary mutual fund portfolio management.

4.) Total AUM = $300 million.



First, the B/D question - Why NOT to have one…



If you can avoid it, DO NOT have a B/D relationship. The B/D regardless

of whether or not you form your own RIA and custody the MAJORITY of

your assets with Schwab or Fidelity HAS to carry regulatory oversight over

all of your accounts. They are listed as an ‘interested party’ on your

statements which are sent to your clients, and it does cause a certain

level of aggrevation when dealing with your own practice issues.



B/D - Why TO have one…



You will give up your trails on your OUTside mutual fund holdings, you

will still be able to be the B/D or agent of record on your variable annuity

contracts… AND… it buys you some time to still get 100% of your AUM

to a fee-based ONLY model through your RIA. At least you can control

the assets in the interim without having to explain the whole fee-based

thing in the event you have some clients who are commission-based and

you don’t want them to go anywhere else.



The RIA thing - costs, etc.



For starters, you’ll have to engage the services of an attorney, or a bunch

of them. Assuming a 4 to 6 person firm, you’ll be paying $15,000 in

fees for your LLC, and RIA documents. If you are a single-person firm, it

will be $7,000, roughly. You could also have the attorney hold your LLC,

and apply for your RIA without your name on either document… a good

thing to consider if you have to sign, each year, that you presently hold

no outside business interests…



Don’t forget about your first months rent payment, furniture expenses,

office equipment expenses. I’d say that we each coughed up $20,000 to

make sure we had the proper amount of dough in the bank to meet our

obligations to our assistant, and other capital expenses within the first 2

to 3 months.



Startup, time and realistic expectations -



Expect that it will take 8 weeks to transition 60% + of your assets to the

new firm. You will most likely 'bill’for your first time following 6 weeks of

opening your doors, and it will be roughly 50% of what you can expect

under ‘normal’ billing circumstances for the next full quarter.



We opted for Fidelity.



Annuity contracts canNOT be held on a Fidelity statement unless they are

a Fidelity Annuity. Thankfully, this is leading to a TON of 1035’s (which,

by the way, are a piece of cake when you have a fee-only RIA) - the

annuities carry a .25% M/E (skinny…skinny…) which gives you the ability

to bill the annuity at 1%, and STILL save the client money.



Discretionary money management - The BIG BIG Benefit…



There is nothing better than building and managing a group of 8 portfolio

models. You want to make a change with a fund within your lineup? Just

hit a few buttons, and the portfolios (across the board) change for

everyone.



More on the B/D and their OWN RIA -



They allow most of the things that a normal RIA would allow - The major

difference is that they take SOOOOO much of your revenue to a point that

the profit margins shrink… they call it ‘admin’ charges. I called it BS and

set up my own firm. They are toooo expensive, and they will also tell you

that ‘you don’t want the risk of setting up your own RIA… join ours and

don’t worry about the headaches…’. Blah, blah, blah… it’s not easy, but I

can see the benefits of going the direct RIA route. On managed account

(separate accounts) they were a JOKE!



The big expenses are as follows:



1.) Attorney

2.) Time - you will spend time on your billing software

3.) Time - you will spend time on your portfolio management software

4.) Rent

5.) Tech and computer expenses

6.) Assistant



You’ll also find that the major custodians will help you with the expenses

affiliated with transfering your book - i.e. overnights to your clients, etc.

Also, they may build into the proposal $7k to $10k for some of your

software purchases (i.e. portfolio and billing software) that will need to be

bought prior to collecting one dime from your client accounts.



Too much more to share - it’s a great thing.



C

Excellent post with good information.

Captain,

You are the MAN.  Thanks for the info.  Big help!!

Forgot one thing on the B/D side of 'why vs. why-not…'



There are a bunch of BD’s that will insist that you give them a portion of

your RIA revenue (10 to 15%) if you do a dual deal (RIA and B/D).



There are also a small handful of (in my case…) Fidelity-friendly B/D’s -

that means that they understand the need NOT to be involved in the daily

management of your RIA. That being the case, they take NO overrides on

your RIA business. They don’t even OFFER a fee-based solution because

they are catering, primarily, to the person doing the RIA and the BD.



After we tallied our fees for registrations in the specific states, and our E/

O insurance on the BD-side, it looks to me like it’s a breakeven for us at

best. So, it’s my guess that my series 7 will be on ‘ice’ within 12 months.

I don’t see the need. I have one client, directly, with the BD… with a

bunch of outside mutual funds and annuities. Those, too, will eventually

head to the RIA-side… but, for the time, I just wanted to do a simple BD

change letter, rather than opening a new account.



I’ll also add this… don’t forget that the custodian (Schwab or Fidelity)

doesn’t let you keep any trails. You bill your clients for your revenue

source. The best part, in some cases, is being able to also bill for time

spent with other professionals (i.e. cost basis research for an estate

planner on a date of death case @$200 per hour). There are lots of fringe

benefits that the RIA will give you.



Good luck - feel free to pose any other questions… happy to help.



C

Cap,

What aspects of compliance are you responsible for as your own RIA rather than working with a b/d?  Are there additional costs associated with it?

Great post!  Thanks!

The compliance thing is always the big mystery when you start this process.

I can say that we have one person designated as the CCO (Chief Compliance Officer).  We have adopted a compliance manual which pretty much organizes our firm with respect to the responsibilities, etc. of each member.  Once you create your firm, you'll find that you are compliant, generally, right away, since you are new and haven't had a chance to really get going.  But, you are required to document your advisory services, conduct a risk assessment, maintain a client profile and keep copies of your correspondance.  We have contracted with a firm to archive our e-mail correspondence which would allow us to search for certain keywords or phrases at the request of an SEC audit.

The costs aren't huge concerning the compliance issue.  The time will HAVE to be spent keeping things neat and organized, however, it's not going to be the death of any practice.  The B/D has their own set of rules that you have to follow and they are annoying..... but, nothing that gets your underwear in a knot. 

Suitability - we oversee the suitability of each of our investment recommendations.  We profile the client and assign them a risk classification (conservative, mod cons... aggressive) and then complete a Morningstar Risk assessment and keep it in the file.  We then build our portfolios based on that data and select our own funds.  I realize that this isn't anything groundbreaking, but it's a set of asset allocation tools that we ALL adhere to and it can be used to document that the risk and allocation of the portfolio recommendation matches the risk tolerance of the client.  It's simple, easy and effective, and can be a good measure of 'work done' in your file for compliance purposes.

The B/D will give you some of these tools, but I'd rather use what I think is best for my client.  That's why we left our old firm.

We fretted long and hard about 'how much would compliance cost', and 'what's the time involved', and I've gotta say that initially it wasn't as big of a deal as we thought. 

Sometimes, it's just best to get involved and go forward without worrying about the small stuff.  Compliance is a big, big area and can really discourage some people.  But we've reassured ourselves that we weren't reinventing the wheel and LOTS of people have done this very thing well, well, before us. 

So, off we went...

C

There are consulting firms out there that will do all the leg work for  you, essentially a turn-key deal including setting up your files, giving you a compliance manual that has been tried and tested and so forth.

You can find them with Google.

Thanks fellas!

[quote=NASD Newbie]

There are consulting firms out there that will

do all the leg work for you, essentially a turn-key deal including setting

up your files, giving you a compliance manual that has been tried and

tested and so forth.

You can find them with Google.